Hewlett Packard's announced acquisition of Exstream Software was an eye-opener on Tuesday morning! Once I had my cup of coffee and began to think about the details, a few questions bubbled to the surface:

　　How much could/would HP pay for Exstream Software?
　　How does this acquisition compare to some similar ones over the last few years?
　　How big is the market for customized customer communication - or what ever you want to call it? For some it's 　　　　　　　Transpromo - the "ballpark" in which Exstream was playing.

　　I knew that executives at HP and Exstream would not comment since the acquisition has not closed and because HP is a publicly traded company. So I began my search for the answers to the questions the old fashion way - research and contacts. Note that many of the comments below are educated speculation but hopefully meaningful to our readers. Once the deal closes we will report more information about this transaction.

　　How much could/would HP pay for Exstream Software?

　　Hewlett Packard - according to Yahoo Finance - has annual revenues of $104.3 billion (trailing twelve months) and cash on hand (most recent quarter) of about $11.5 billion. With a pocketbook like that, HP would certainly be able to make an investment of considerable size in one or more companies.

　　So what do we estimate that HP might have paid for Exstream Software? Let’s look back at a well-kept secret; the investment that American Capital made in Exstream last June. One June 28, 2007, American Capital announced that it had invested $548 million in the recapitalization of Exstream Software.

　　That sum - $548 million - was for about 60% ownership. Exstream's founders and other management also invested in the equity to retain more than 40% ownership. On first blush, that brings the value of the company to more than $900 million. Assuming that American Capital would like to make a little something for their trouble, I believe it is likely that HP will pay more than $1 billion for Exstream.

　　I believe it is likely that HP will pay more than $1 billion for Exstream.

　　Assuming that Exstream had revenues of about $100 to $105 million in 2007, that's a pretty penny. And that's a very good multiple - approximately 10 times revenue. Exstream's revenue estimate for 2007 comes from previously published figures and growth rates in 2005 and 2006:

　　2007 revenues were estimated to be up about 25% over 2006 - my own estimate based on a more conservative growth pattern (taking into consideration the "Law of Big Numbers…")
　　2006 revenues published in the Software Magazine, Software 500 Index were $82 million, a growth of 38% over 2005
　　2005 revenues published in the Deloitte 2006 Fast 500 List were $59.7 million, a growth of 40% over 2004, per an 　　　　　Exstream press release dated January 24, 2006.

　　How does this acquisition compare to some similar ones over the last few years?

　　It is not easy to find a company exactly like Exstream to use as a comparison. Exstream is well known as one of the best software providers in the personalized communications market. The acquisition that may be most comparable is that of XMPie by Xerox. Xerox paid $54 million for XMPie and the projected revenues for 2006 were $15 million; the multiple 3.6 times revenue. The acquisition in 2004 of Group 1 Software by Pitney Bowes was a deal for a company with about the same revenues, but the multiple of 2.7 times revenue brought the purchase price up to only $321 million.

　　How big is the market for customized customer communication software?

　　How does this acquisition fit into the market niche in which Exstream plays? Did HP pay a multiple of the entire market to buy less than 20% market share? Remember that these are just observations - trying to answer these questions without speaking with company executives is difficult.

　　InfoTrends' report - The TransPromo Revolution: The Time is Now! - measures the market in number of impressions rather than sales of software applications. According to the report, the TransPromo full color digital output for North America was 1.62 billion equivalent images in 2006. The output is forecast to increase at an average of 91% annually to 21.72 billion images in 2010; the growth driven by "advances in digital printing equipment … and continued market adoption as organizations seek to exploit technology to drive loyalty, brand recognition, and profits."

　　The actual market size in dollars for "customized customer communication" is pretty vague. The term "TransPromo" has been applied to the ever-evolving technology that produced printed bills and statements; technology that is closely related to variable data printing software used for versioned collateral and personalized direct mail.

　　If we confine ourselves to the TransPromo market; we can back into a market size by making some estimates. Allowing for a bit of a "fudge factor," that market could currently be about $600 to $650 million or more. To arrive at that number, I had to slice out the document composition software portion from several companies and make some guesses about the US portion of revenue for others. Suffice it to say that this is a wild educated guess.

　　As soon as the SEC reports come out, we'll dig deeper into the deal to get all the facts. Keep watching!